Forby Ex Rel. All Others Similarly Situated in Ill. v. One Techs., L.P.

Case: 17-10883 Document: 00514739890 Page: 1 Date Filed: 11/28/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 17-10883 November 28, 2018
Lyle W. Cayce
Clerk
VICKIE FORBY, individually and on behalf of all others similarly situated in
Illinois,
Plaintiff - Appellant
v.
ONE TECHNOLOGIES, L.P., ONE TECHNOLOGIES MANAGEMENT,
L.L.C.; ONE TECHNOLOGIES CAPITAL, L.L.P.,
Defendants - Appellees
Appeal from the United States District Court
for the Northern District of Texas
Before GRAVES and COSTA, Circuit Judges, and BENNETT, District Judge. ∗
ALFRED H. BENNETT, District Judge:
Plaintiff-Appellant Vicky Forby (“Forby”) appeals the district court’s
grant of Defendant-Appellee One Technologies, L.P.’s (“One Tech”) motion to
compel arbitration. Forby contends that the district court erred in finding she
∗
District Judge for the Southern District of Texas, sitting by designation.
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was not prejudiced by One Tech’s substantial invocation of the judicial process.
For the reasons set forth below, we conclude that the district court erred when
it found One Tech had not waived its right to arbitration because Forby had
not demonstrated that she was prejudiced. Accordingly, we reverse the district
court’s judgment.
I.
On April 24, 2015, Forby filed a class action in Illinois state court that
was later removed to the United States District Court for the Southern District
of Illinois on July 14, 2015. Forby brought claims against One Tech for violation
of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”)
and unjust enrichment under Illinois law. In the notice of removal, One Tech
did not reference arbitration but rather argued that Forby’s claims were
baseless, and that no class should be certified. On July 21, 2015, One Tech filed
a motion to dismiss for failure to state a claim and, in the alternative, moved
to transfer the case for forum non conveniens, arguing that Forby’s claims were
subject to arbitration in Texas and that an Illinois district court could not
compel arbitration outside of the confines of its district. On September 4, 2015,
One Tech filed an opposed motion to stay discovery until the Illinois district
court ruled on the motion to dismiss. On March 25, 2016, the Illinois district
court issued a Memorandum and Order transferring the case to the Northern
District of Texas.
After the case was transferred, One Tech retained new counsel, who filed
an unopposed extension of time to answer the complaint to “investigate
[Forby’s] claims and prepare an appropriate response.” On May 9, 2016, One
Tech filed a 12(b)(6) motion to dismiss, asking the Texas district court to
dismiss all of Forby’s claims with prejudice. The motion to dismiss did not
mention arbitration. Forby filed her response to One Tech’s motion to dismiss.
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In its reply to Forby’s response, One Tech once again did not mention
compelling arbitration. On March 31, 2017, the district court denied the motion
to dismiss with respect to Forby’s ICFA claim concerning the deceptiveness of
One Tech’s website and granted the motion as to the unjust enrichment
claim—dismissing that claim with prejudice.
On April 17, 2017, four days after attending a Rule 26(f) conference and
receiving Forby’s requests for production, One Tech finally filed its motion to
compel arbitration. Additionally, that same day, One Tech filed an expedited
motion to stay all discovery pending the resolution of the motion to compel. On
April 24, 2017, the district court conducted a hearing and granted the motion
to stay.
On July 7, 2017, the district court issued an order granting One Tech’s
motion to compel arbitration and dismissed the case with prejudice. The
district court found that One Tech had substantially invoked the judicial
process but that Forby had not suffered prejudice. Specifically, the district
court stated that Forby had “suffered some prejudice” but not to “the extent
required by existing precedent in the Fifth Circuit,” concluding that “the only
prejudice that Forby has adequately demonstrated is delay, and delay alone is
insufficient . . . .” Forby now appeals the decision of the district court.
II.
We review the district court’s determination of a motion to compel
arbitration de novo, but review any factual findings underlying that
determination for clear error. Janvey v. Alguire, 847 F.3d 231, 240 (5th
Cir. 2017).
III.
“Although waiver of arbitration is a disfavored finding,” the right to
arbitrate—like all contract rights—is subject to waiver. Nicholas v. KBR, Inc.,
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565 F.3d 904, 907 (5th Cir. 2009). “[A] party waives its right to arbitrate if it
(1) ‘substantially invokes the judicial process’ and (2) thereby causes
‘detriment or prejudice’ to the other party.” Al Rushaid v. Nat’l Oilwell Varco,
Inc., 757 F.3d 416, 421 (5th Cir. 2014) (quoting Miller Brewing Co. v. Fort
Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir.1986)).
A.
We first examine whether One Tech substantially invoked the judicial
process. To invoke the judicial process, a party “must, at the very least, engage
in some overt act in court that evinces a desire to resolve the arbitrable dispute
through litigation rather than arbitration.” In Re Mirant, 613 F.3d 584, 589
(5th Cir. 2010) (quoting Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324,
326 (5th Cir. 1999)). “A party waives arbitration by seeking a decision on the
merits before attempting to arbitrate.” Id. (quoting Petroleum Pipe Ams. Corp.
v. Jindal Saw, Ltd., 575 F.3d 476, 480 (5th Cir. 2009)). “A dismissal with
prejudice for failure to state a claim is a decision on the merits and essentially
ends the plaintiff’s lawsuit.” Id. (quoting Mahone v. Addicks Util. Dist. of
Harris County, 836 F.2d 921, 940 (5th Cir. 1988)).
One Tech was fully aware of its right to compel arbitration when it filed
its 12(b)(6) motion to dismiss. After all, it presented the right to arbitration as
the reason it sought to transfer the case from Illinois to Texas. However, once
in Texas, One Tech did not move to compel arbitration even in the alternative
to its motion to dismiss. Rather, it pursued and partially obtained a dismissal
with prejudice of Forby’s claims. One Tech’s action of moving to dismiss Forby’s
claims with no mention of compelling arbitration demonstrated a desire to
resolve the dispute in litigation rather than arbitration.
The cases One Tech cites in which courts found no invocation of the
judicial process are distinguishable from its full-throated attempt to win this
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case on the merits in federal court. Some of those cases found that the party
seeking arbitration did not invoke the judicial process because its motion to
dismiss was filed concurrently with a motion to seek arbitration. See, e.g.,
Keytrade USA, Inc. v. Ain Temouchent M/V, 404 F.3d 891, 897 (5th Cir. 2005)
(motion for summary judgment filed concurrently with motion to compel
arbitration). In others, the party seeking arbitration did not wait for the court’s
merit ruling—and thus get a sense of the court’s view of the case—before
moving to compel arbitration. Pacheco v. PCM Const. Servs., L.L.C., 602 F.
App’x 945, 948 (5th Cir. 2015) (motions to dismiss dealt with narrow ancillary
issues and had not been ruled on when the motion to compel arbitration had
been filed.). Even further afield are cases in which the party seeking
arbitration never sought a merits ruling in court but only delayed or raised
procedural concerns. See Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co.,
304 F.3d 476, 485 (5th Cir. 2002); Sedco, Inc. v. Petroleos Mexicanos Mexican
Nat’l Oil Co., 767 F.2d 1140 (5th Cir. 1985). In contrast, One Tech sought a full
dismissal on the merits—prejudice attaches to a Rule 12(b)(6) dismissal. Its
conduct thus fits squarely within our caselaw recognizing that the judicial
process is invoked when a party “seek[s] a decision on the merits before
attempting to arbitrate.” Petroleum Pipe, 575 F.3d at 480; see also Mirant, 613
F.3d at 589. Accordingly, the district court was correct in finding One Tech
substantially invoked the judicial process.
B.
“In addition to invocation of the judicial process, the party opposing
arbitration must demonstrate prejudice before we will find a waiver of the
right to arbitrate.” Nicholas, 565 F.3d at 910. Prejudice “refers to the inherent
unfairness in terms of delay, expense, or damage to a party’s legal position
that occurs when the party’s opponent forces it to litigate an issue and later
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seeks to arbitrate that same issue.” Republic Ins. Co. v. PAICO Receivables,
L.L.C., 383 F.3d 341, 346 (5th Cir. 2004) (quoting Subway Equip., 169 F.3d
at 327)). It is true that delay in asserting the right to arbitrate alone will not
result in waiver. Nicholas, 565 F.3d at 910 (citing Gulf Guar. Life Ins. Co. v.
Conn. Gen. Life Ins. Co., 304 F.3d 476, 484 (5th Cir. 2002)). However, “such
[a] delay ‘does bear on the question of prejudice, and may, along with other
considerations, require a court to conclude that waiver has occurred.’” Id.(quoting Republic Ins., 383 F.3d at 346 (citation omitted)). When a party fails
to demand arbitration and engages in activity inconsistent with the intent to
arbitrate, the party later opposing a motion to compel may more easily show
that its position has been prejudiced. Id.One Tech received a transfer to Texas for the sole purpose of compelling
arbitration but waited thirteen months before moving to compel arbitration
while it attempted to obtain a dismissal with prejudice from the district court.
The district court correctly concluded that Forby experienced prejudice from
One Tech’s delay in invoking arbitration. “A party cannot keep its right to
demand arbitration in reserve indefinitely while it pursues a decision on the
merits before the district court.” Mirant, 613 F.3d at 591. However, the district
court failed to find prejudice for damage to Forby’s legal position or from
additional expenses incurred litigating her case in the district court. 1
1 The district court concluded that it could not determine whether Forby incurred
significant legal expenses because she did not “state the costs she incurred while responding
to” One Tech’s motion to dismiss. This Court does not require a party to put on specific
“evidence in terms of dollars and cents of its litigation costs” to determine that the party
suffered an increase in legal expenses. Nicholas, 565 F.3d at 910. Whether a party suffered
an increase in legal expenses due to a delay in the invocation of arbitration can be discerned
from the litigation activities the parties engaged in prior to the motion to compel arbitration.
Id.; see also Janvey v. Alguire, 847 F.3d 231, 244 (5th Cir. 2017). However, with no factual
finding concerning Forby’s legal expenses, the Court cannot say that the district court clearly
erred on this point.
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The district court erred in concluding that Forby failed to establish
prejudice to her legal position. When a party will have to re-litigate in the
arbitration forum an issue already decided by the district court in its favor,
that party is prejudiced. Nicholas, 565 F.3d at 911; see also Petroleum Pipe,
575 F.3d at 482 (citing Kramer v. Hammond, 943 F.2d 176, 179 (2d Cir. 1991)
(“Prejudice can be substantive, such as when a party loses a motion on the
merits and then attempts, in effect, to relitigate the issue by invoking
arbitration.”). A party does not get to learn that the district court is not
receptive to its arguments and then be allowed “a second bite at the apple
through arbitration.” Petroleum Pipe, 575 F.3d at 482.
One Tech’s motion to dismiss included the attachment of declarations
and exhibits detailing One Tech’s website and went directly to the merits of
Forby’s ICFA claim. Specifically, the motion requested that the district court
find the disclosures present on One Tech’s website meant that the website was
not deceptive as a matter of law. The district court was not receptive to One
Tech’s argument and declined to find that the website was not deceptive as a
matter of law. To be sure, the Rule 12 ruling did not finally resolve whether
the website was deceptive. However, it was not a motion seeking dismissal
because of a technical pleading deficiency—it asked the court to look at the key
question the case presents concerning adequacy of the website disclosures. If
this case were to proceed to arbitration, Forby would have to re-litigate
whether One Tech’s website was deceptive in front of an arbitrator after One
Tech already tested its arguments with a district court judge. Furthermore,
One Tech’s agreement not to seek a Rule 12 dismissal in the arbitration would
not eliminate the prejudice from withdrawing this dispute from the court
where its attempt at early dismissal failed. One Tech was able to check the
district court’s temperature on the disclosure issue. It should not now be able
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to move the case to a forum that might prove more favorable. Therefore, we
find that Forby’s legal position was damaged by One Tech’s delay in moving to
compel arbitration. Accordingly, the district court erred in finding Forby was
not prejudiced.
IV.
For the foregoing reasons, the district court’s determination that One
Tech did not waive its right to arbitration was in error. We hold that One Tech
substantially invoked the judicial process and that Forby was prejudiced
thereby. Accordingly, the order of the district court finding Forby had not
suffered enough prejudice to establish waiver is REVERSED. The district
court’s order granting One Tech’s motion to compel arbitration is VACATED.
The case is hereby REMANDED to the district court for further proceedings
consistent with this opinion.
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